Money makeover: Single mom

Jacqui Sentmanat is trying to give her child the best of everything, but who's looking out for her financial future?

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By Joe Light, Money Magazine staff reporter

The Sentmanat Family: Franqui, 3, and Jacqui, 42.
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(Money Magazine) -- When you're the single parent of an only child, you want only the best possible life for your kid. That's how Jacqui Sentmanat feels. But it's an expensive proposition.

It already cost the 42-year-old Houston accountant $20,000 to get pregnant through fertility treatments and to take time off work to be with her daughter early on. This nearly drained her emergency savings. She has since replenished the funds, but now she faces a quandary: how to invest for her retirement while tackling her daughter's long-term needs.

For starters, Sentmanat wants to send Franqui, 3, to private school. She has already paid the $8,200-a-year tuition for preschool. That's on top of the $5,500 a year she'll have to shell out for after-school and summer care. And when Franqui gets to high school, annual tuition costs will likely soar above $10,000. Then there's college to worry about. With public schools costing more than $16,000 a year, it's easy to see how saving for Franqui could eclipse any hope of a regular retirement for Sentmanat.

She knows her retirement is important, but she really wants Franqui to be able to graduate without student loans. "This isn't just about freedom for me in retirement," she says, "but freedom for her from debt."

Where she is now

Between her accounting job at an engineering firm and consulting work, Sentmanat earns $128,000 a year. So far she's saved $117,000 for retirement, split among multiple retirement plans. She also has $26,500 in taxable investments, which she is using as a college savings fund for Franqui, and around $12,400 in emergency savings. A mortgage on her $264,500 Houston home and a low-interest car loan make up Sentmanat's only debt.

She concedes that she should have more in savings given her salary. Part of the problem, she says, is that she lived in Los Angeles for 10 years. The high cost of living there kept her from maxing out her savings. But now that she's in Houston, where housing is much cheaper, and after getting a promotion, she's ready to set her sights on her long-term investing strategy.

What she should do

1. Get her investments in line. Since moving to Texas, Sentmanat has begun to sock away 10% of her salary in her employer-sponsored retirement plan. About 6% of her paycheck goes into a traditional 401(k) to take full advantage of her company match, while the other 4% goes into a Roth 401(k). Unlike with a traditional 401(k), her Roth contributions don't reduce her current taxes. But withdrawals at retirement will be tax-free.

Marc B. Schindler, a certified financial planner with Pivot Point Advisors in Bellaire, Texas, says that in the coming years Sentmanat should try to boost her Roth contributions to 6% to max out her 401(k). The real problem, though, is her investment mix. Virtually none of her investments are in bonds. With at least 20 years until retirement, Sentmanat says she's comfortable being all in stocks. But Schindler recommends a small weighting in fixed income - 18%, split between domestic and foreign bond funds - in part to safeguard against losses should she need to tap some of her money sooner than expected.

2. Another problem: Sentmanat has four leftover 401(k)s from old jobs. Schindler says she should roll those into a traditional IRA to get more investment choices with lower fees. Then, in 2010, when the income limit on Roth IRA conversions disappears, she can convert it into a Roth. She'll have to pay taxes at conversion. But as with the Roth 401(k) she funds at work, she can tap the money upon retirement tax-free.

3. Increase her life insurance. If something were to happen to Jacqui, Franqui would need much more than the $50,000 in life insurance that Sentmanat's employer provides. Jacqui wisely bought a supplemental $250,000 term policy. But Schindler recommends adding another $500,000 of coverage. It will cost $720 more per year, but it should be enough to pay off the house and cover Franqui's education, among other things. He also tells Sentmanat to draft a will and name a guardian for Franqui as soon as possible.

4. Set up a 529. Sentmanat has yet to open a 529 college savings account for Franqui. That's partly because she isn't sure which state's plan to choose. Since Texas has no state income tax, Sentmanat doesn't need to focus just on her home state's plan, as there would be no tax break for doing so. Instead she should pick the plan with the best options and lowest fees, Schindler says. He recommends the Arkansas plan, run by Barclays; the Nevada and Utah plans, which both use Vanguard funds; and Virginia's state-run 529.

To reach her goal of saving for Franqui's college, Sentmanat needs to start stuffing $450 a month into the 529, Schindler says. Sentmanat says she doesn't think she can afford that right away but $150 a month is doable. That might not be enough to pay for 100% of Franqui's college, but every little bit Sentmanat saves now will mean that much of a richer life for Franqui down the road.

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